Enjoy the Summer
It’s summertime and, the way I see it, a nice time to take a vacation. Have fun for a few weeks. When you get back, not much will have changed – you probably won’t have too many urgent messages, and the Nasdaq still won’t be over 2000. Everybody worked way too hard last year, so why not enjoy a little break while the market’s wheezing?
The optical networks market is in a phase I would call “Optimization” right now, and it’s going to take some time to come out of it, probably two or three years. I tend to think of the optical networks market as evolving through three epochs:
Expansion
In this phase, two powerful forces – competition and the Internet – drove carriers to lay more fiber, add DWDM, expand out of their regions into new territories, and explore new service models to address burgeoning bandwidth demand and forecasts of exponential growth of traffic.
The Internet came on so quickly that carriers reacted much more frenetically than they had planned. The only way to accommodate the Internet was to throw capacity at it and assume revenues would follow. Wholesale carriers emerged to bring capacity to market as cheaply and flexibly as possible, while DSL LECs emerged to open up the local bottleneck with broadband access at affordable rates.
The beneficiaries of this phase, which lasted from 1996 to September 2000 were the big guys: Ciena Corp. (Nasdaq: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), Corning Inc. (NYSE: GLW), JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), Juniper Networks Inc. (Nasdaq: JNPR), and Nortel Networks Corp. (NYSE/Toronto: NT) – along with a number of startups that got to the public market before it fell of the cliff. Each of these companies had big transport bandwidth, big IP bandwidth, and the ability to deliver in quantity (with vendor financing to boot!). Optimization
This phase, which began in late 2000 and will continue through 2003 at least, is a severe reaction to brutal market forces that swept through the industry over the past six months. I liken it to the “Perfect Storm” in which three storms collided off the coast of Massachusetts to create a mega-storm that drove fishing boats to their graves. The three storms here are debt, price erosion, and customer weakness.
The network buildouts of the expansion phase were highly capital intensive, since most network operators believed that they had to own their facilities to maintain a competitive advantage and control their margins. Capital was readily available to finance these projects, though the price of this debt was rising as the years went on, and many carriers, particularly wholesalers, found themselves having to sell extraordinary amounts of capacity in order to make any margin above their debt payments.
Severe competition among wholesalers led to sever price erosion for dark fiber, wavelengths, and capacity leases, which led these carriers to sell most of their services at or below cost, driving them out of business. Customer weakness has amplified the problem, spreading the malaise from wholesalers to all carriers, as bandwidth hungry dotcoms dry up and many business users find their own bandwidth demand to be not as dramatic as originally predicted.
Why? Well, DSL LECs didn’t deliver as promised because of a terribly architected business model; broadband wireless suffers from limited performance and onerous capital requirements; and fiber to the building is the worst of all, requiring massive capital outlays and political maneuvers never dreamt of by most new entrants. The result is a phase of the market’s evolution in which carriers struggle to survive by driving as much cost out of their networks as possible, while adding a few new services based on sustainable pricing models.
The big players don’t really thrive in this phase, because it does not reward companies that provide big bandwidth on a big scale, but rather those that provide very cheap bandwidth, service-aware equipment, and dramatically lowered operations costs. The companies that will survive this phase will likely be those that add value to a network (ultra-long-haul DWDM, next-generation Sonet, optical switching) or those that add revenue opportunities cheaply (edge routers, storage networking systems, data center equipment). Carriers will go through their own shakeout as those that experiment with new service types or new business models find which work and which don’t. All in all, it’s not a very exciting phase, because it does not demand significant technical innovations and actually discourages them in some instances.
During optimization, analyst forecasts tend to be more inaccurate than usual (mine included), and the stock market remains uninterested in IPOs. Nice time for a vacation if you’re an investor. An easier time to develop products, though, absent the pressure of impossible delivery schedules – if you can raise the money.
Transformation
The payoff comes here, probably in 2003 or 2004. Assuming the process of optimization is a healthy one and a number of vendors and carriers emerge the stronger for it, this phase then encourages a more radical transformation of carriers based on novel optical layer architectures.
Where the first two phases remained wedded to a network architecture of pipes and fittings, this phase encourages true intelligent optical networking, in which the optical layer is highly networked, with sophisticated provisioning and restoration mechanisms in place, accessed through a standardized, out-of-band control plane. Intelligent subsystems play an important role, because this era signals the end of span engineering. Networks are dynamic, and equipment is plug-and-play. To add a lambda you simply plug in the appropriate line cards, and the network figures out the rest. Optical add/drop multiplexers (OADMs) and optical switches play a fundamental role in this era, and in many cases are well integrated into optical transport gear. In the packet layer, edge routers are extremely agile and able to process packets at line rates with extreme precision, handing them off to massive core routers that are in fact more like MPLS (multiprotocol label switching) switches, whose time will have finally come.
With these tools at their disposal, carriers will have opportunities to entirely re-envision themselves, breaking the boundaries that currently exist between long haul and local, wholesale and retail. The market should be able to accommodate a reasonable number of super carriers and specialists (three per major market?), each providing value for either its reach and scale or its emphasis on a particular service type, such as storage or content delivery.
Who flourishes here? Well, maybe Nortel, maybe not. They have many of the tools to compete in this era, but there is ample room for startups, because this era rewards innovations above basic economics – though innovations that blend both will be most rewarded. Tunable lasers, OADMs, dynamic dispersion compensators, amplifiers, and monitoring gear will be essential. At the systems level, wavelength switching transport gear will be prized; massively scaleable packet switches and fine-grained edge routers will be the building blocks of next-gen IP networks. I still don’t quite understand softswitches or Class 5 replacements, so I can’t really say if they’re the answer or not. My guess is that by 2004 the ILECs still won’t be budging from their roosts, so the Class 5 switch will have plenty of life left in it – probably DSL as well.
* * * * *
So this optimization phase we’re in isn’t much fun. It makes for rather lackluster conferences and trade shows and depressing stock market analysis – but it does grant the industry some breathing room. It also takes some of the manic urgency out of the air and makes people a bit more reasonable. NFOEC in Baltimore felt like 1995 this week (I avoided the financial track so I wouldn’t have to listen to the gloom and doom). It was quiet, but not desperate, and many companies were showcasing incremental improvements in their products without significant hype.
And there were characters, circa 1995 as well, which was heartening.
I met with David Rusin, President of American Fiber Systems Inc., who is building out dark fiber networks in all the places Metromedia Fiber Network Inc. (MFN) (Nasdaq: MFNX) isn’t: Tier 2, 3, and 4 metro areas. He’s a character of the type I used to meet, with stories of battling city bureaucrats and unions, amid the Byzantine processes required to lay a cable down a street or up a pole. He swears a lot, even when talking to strangers (me), which I like, and he seems to love his job the way a veteran politician might, or a public defender.
I met with Bryson Hollimon, Managing General Partner of Technology Venture Partners from my old home of Minneapolis. In the face of this deteriorating market he is unflappable, with the backyard barbecue pleasantness of a Midwesterner and a commitment to enjoying himself and prevailing, no matter what the day’s climate.
The sessions I attended at NFOEC were rather boring, with few surprises, but remarkably well attended. A couple weeks ago in Cannes, France, at the IIR WDM 2001 conference, the mood was a bit more challenging, to put it delicately. Too many big carriers saying they were happy with SDH for my liking, and too few competitors with anything to say at all (though Pim Versteeg’s presentation for Carrier1 was fantastically exuberant, his BS detector working in full force). Once competition goes away, markets get rather uninspiring, and the incumbents go back to taking their sweet time with innovation. It may be practical in today’s market, but it’s plain dull.
The conference had an excellent turnout of operators from all over Europe, but the fire was more or less snuffed out of the room by the collapse of Viatel and others, making many presentations from vendors seem rather at odds with reality, while those from operators seem downright conservative.
The beach was nice, though.
The optical networks market is in a phase I would call “Optimization” right now, and it’s going to take some time to come out of it, probably two or three years. I tend to think of the optical networks market as evolving through three epochs:
Expansion
In this phase, two powerful forces – competition and the Internet – drove carriers to lay more fiber, add DWDM, expand out of their regions into new territories, and explore new service models to address burgeoning bandwidth demand and forecasts of exponential growth of traffic.
The Internet came on so quickly that carriers reacted much more frenetically than they had planned. The only way to accommodate the Internet was to throw capacity at it and assume revenues would follow. Wholesale carriers emerged to bring capacity to market as cheaply and flexibly as possible, while DSL LECs emerged to open up the local bottleneck with broadband access at affordable rates.
The beneficiaries of this phase, which lasted from 1996 to September 2000 were the big guys: Ciena Corp. (Nasdaq: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), Corning Inc. (NYSE: GLW), JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), Juniper Networks Inc. (Nasdaq: JNPR), and Nortel Networks Corp. (NYSE/Toronto: NT) – along with a number of startups that got to the public market before it fell of the cliff. Each of these companies had big transport bandwidth, big IP bandwidth, and the ability to deliver in quantity (with vendor financing to boot!). Optimization
This phase, which began in late 2000 and will continue through 2003 at least, is a severe reaction to brutal market forces that swept through the industry over the past six months. I liken it to the “Perfect Storm” in which three storms collided off the coast of Massachusetts to create a mega-storm that drove fishing boats to their graves. The three storms here are debt, price erosion, and customer weakness.
The network buildouts of the expansion phase were highly capital intensive, since most network operators believed that they had to own their facilities to maintain a competitive advantage and control their margins. Capital was readily available to finance these projects, though the price of this debt was rising as the years went on, and many carriers, particularly wholesalers, found themselves having to sell extraordinary amounts of capacity in order to make any margin above their debt payments.
Severe competition among wholesalers led to sever price erosion for dark fiber, wavelengths, and capacity leases, which led these carriers to sell most of their services at or below cost, driving them out of business. Customer weakness has amplified the problem, spreading the malaise from wholesalers to all carriers, as bandwidth hungry dotcoms dry up and many business users find their own bandwidth demand to be not as dramatic as originally predicted.
Why? Well, DSL LECs didn’t deliver as promised because of a terribly architected business model; broadband wireless suffers from limited performance and onerous capital requirements; and fiber to the building is the worst of all, requiring massive capital outlays and political maneuvers never dreamt of by most new entrants. The result is a phase of the market’s evolution in which carriers struggle to survive by driving as much cost out of their networks as possible, while adding a few new services based on sustainable pricing models.
The big players don’t really thrive in this phase, because it does not reward companies that provide big bandwidth on a big scale, but rather those that provide very cheap bandwidth, service-aware equipment, and dramatically lowered operations costs. The companies that will survive this phase will likely be those that add value to a network (ultra-long-haul DWDM, next-generation Sonet, optical switching) or those that add revenue opportunities cheaply (edge routers, storage networking systems, data center equipment). Carriers will go through their own shakeout as those that experiment with new service types or new business models find which work and which don’t. All in all, it’s not a very exciting phase, because it does not demand significant technical innovations and actually discourages them in some instances.
During optimization, analyst forecasts tend to be more inaccurate than usual (mine included), and the stock market remains uninterested in IPOs. Nice time for a vacation if you’re an investor. An easier time to develop products, though, absent the pressure of impossible delivery schedules – if you can raise the money.
Transformation
The payoff comes here, probably in 2003 or 2004. Assuming the process of optimization is a healthy one and a number of vendors and carriers emerge the stronger for it, this phase then encourages a more radical transformation of carriers based on novel optical layer architectures.
Where the first two phases remained wedded to a network architecture of pipes and fittings, this phase encourages true intelligent optical networking, in which the optical layer is highly networked, with sophisticated provisioning and restoration mechanisms in place, accessed through a standardized, out-of-band control plane. Intelligent subsystems play an important role, because this era signals the end of span engineering. Networks are dynamic, and equipment is plug-and-play. To add a lambda you simply plug in the appropriate line cards, and the network figures out the rest. Optical add/drop multiplexers (OADMs) and optical switches play a fundamental role in this era, and in many cases are well integrated into optical transport gear. In the packet layer, edge routers are extremely agile and able to process packets at line rates with extreme precision, handing them off to massive core routers that are in fact more like MPLS (multiprotocol label switching) switches, whose time will have finally come.
With these tools at their disposal, carriers will have opportunities to entirely re-envision themselves, breaking the boundaries that currently exist between long haul and local, wholesale and retail. The market should be able to accommodate a reasonable number of super carriers and specialists (three per major market?), each providing value for either its reach and scale or its emphasis on a particular service type, such as storage or content delivery.
Who flourishes here? Well, maybe Nortel, maybe not. They have many of the tools to compete in this era, but there is ample room for startups, because this era rewards innovations above basic economics – though innovations that blend both will be most rewarded. Tunable lasers, OADMs, dynamic dispersion compensators, amplifiers, and monitoring gear will be essential. At the systems level, wavelength switching transport gear will be prized; massively scaleable packet switches and fine-grained edge routers will be the building blocks of next-gen IP networks. I still don’t quite understand softswitches or Class 5 replacements, so I can’t really say if they’re the answer or not. My guess is that by 2004 the ILECs still won’t be budging from their roosts, so the Class 5 switch will have plenty of life left in it – probably DSL as well.
So this optimization phase we’re in isn’t much fun. It makes for rather lackluster conferences and trade shows and depressing stock market analysis – but it does grant the industry some breathing room. It also takes some of the manic urgency out of the air and makes people a bit more reasonable. NFOEC in Baltimore felt like 1995 this week (I avoided the financial track so I wouldn’t have to listen to the gloom and doom). It was quiet, but not desperate, and many companies were showcasing incremental improvements in their products without significant hype.
And there were characters, circa 1995 as well, which was heartening.
I met with David Rusin, President of American Fiber Systems Inc., who is building out dark fiber networks in all the places Metromedia Fiber Network Inc. (MFN) (Nasdaq: MFNX) isn’t: Tier 2, 3, and 4 metro areas. He’s a character of the type I used to meet, with stories of battling city bureaucrats and unions, amid the Byzantine processes required to lay a cable down a street or up a pole. He swears a lot, even when talking to strangers (me), which I like, and he seems to love his job the way a veteran politician might, or a public defender.
I met with Bryson Hollimon, Managing General Partner of Technology Venture Partners from my old home of Minneapolis. In the face of this deteriorating market he is unflappable, with the backyard barbecue pleasantness of a Midwesterner and a commitment to enjoying himself and prevailing, no matter what the day’s climate.
The sessions I attended at NFOEC were rather boring, with few surprises, but remarkably well attended. A couple weeks ago in Cannes, France, at the IIR WDM 2001 conference, the mood was a bit more challenging, to put it delicately. Too many big carriers saying they were happy with SDH for my liking, and too few competitors with anything to say at all (though Pim Versteeg’s presentation for Carrier1 was fantastically exuberant, his BS detector working in full force). Once competition goes away, markets get rather uninspiring, and the incumbents go back to taking their sweet time with innovation. It may be practical in today’s market, but it’s plain dull.
The conference had an excellent turnout of operators from all over Europe, but the fire was more or less snuffed out of the room by the collapse of Viatel and others, making many presentations from vendors seem rather at odds with reality, while those from operators seem downright conservative.
The beach was nice, though.
